The Role of Stocks and Shocks Concepts in the Debate Over Price Versus Quantity

Abstract

Recent literature showed that the choice between a price or quantity control depends, in part, on the dynamic structure of cost uncertainty. Temporary shocks to abatement cost favors the use of a price control, while permanent shocks favor a quantity control. Unfortunately, the importance of this assumption to the optimal choice has not yet received wide attention among economists. We analyze the regulatory sproblem in an alternative setting and reproduce these results. Our contribution is the simplicity of the model and the accessibility of the results, which reinforce the critical role played by the assumed structure of uncertainty.

Keywords

Cap and trade Permanent shocks Tax Transitory shocks

Part of Parsons’ research was supported by the MIT Center for Energy and Environmental Policy Research and the MIT Joint Program on the Science and Policy of Global Change and by a grant from the Doris Duke Charitable Foundation. Part of Taschini’s research was supported by the Grantham Research Institute on Climate Change and by the Centre for Climate Change Economics and Policy, which is funded by the UK Economic and Social Research Council (ESRC) and Munich Re. This draft has benefited from helpful comments from Sam Fankhauser, Cameron Hepburn, Jake Jacoby, Gib Metcalf, John Reilly, Mort Webster and Federica Buricco and participants in the MIT Emissions Prediction and Policy Analysis seminar.

Copyright information

Open AccessThis article is distributed under the terms of the Creative Commons Attribution License which permits any use, distribution, and reproduction in any medium, provided the original author(s) and the source are credited.